Oil closes at new high of $94.53 on supplies drop

In after-hours trade, crude climbs to new record high of $95.28 a barrel

By

MomingZhou

PolyaLesova

SAN FRANCISCO (MarketWatch) -- Crude-oil futures closed at a new high of $94.53 a barrel on Wednesday after U.S. crude inventories dropped surprisingly in the latest week to the lowest level in two years and the dollar touched the lowest against the euro on the Federal Reserve's rate cut.

In after-hours trading, crude-oil futures hit a new record high, surging as high as $95.28 a barrel on the New York Mercantile Exchange. Crude oil for December delivery was last up $4.84, or over 5%, at $95.22 a barrel.

Earlier Wednesday during the regular trading session, crude settled up $4.15, or 4.6%, at $94.53 a barrel, the highest closing price for a front-month contract.

Futures prices of petroleum products also surged.

U.S. commercial crude oil inventories, which are inventories excluding those in the Strategic Petroleum Reserve, fell by 3.9 million barrels to 312.7 million barrels in the week ending Oct. 26, the lowest since October 2005, the Energy Information Administration said Wednesday. Analysts surveyed by Platts expected on Tuesday a build of 1.25 million barrels in stocks.

The dollar hit a record low of $1.4503 per euro after the Federal Open Market Committee, the Fed's rate-setting arm, cut the fed funds rate by 0.25% to 4.5% on Wednesday afternoon. See The Fed.

"This is another bullish report for crude oil," said James Williams, an economist at WTRG Economics, an energy research firm. "Since the Fed cut met expectations, this is fairly neutral. The oil stock decline, not the Fed, is ruling today's market."

'The oil stock decline, not the Fed, is ruling today's market. This market continues to trade on fear and short term news.'
James Williams, WTRG Economics

"This market continues to trade on fear and short term news," Williams added.

Low inventories

EIA's data showed that out of last week's 3.9 million barrel drop, 3.1 million barrels were from Cushing, Oklahoma, which is the delivery point for crude traded on Nymex.

"The large decline at Cushing stocks adds to the upward pressure," said Williams.

Crude imports over the last four weeks have averaged 9.7 million barrels per day, or 481,000 barrels per day less than the same period last year, the EIA said. Last week's imports averaged 9.4 million barrels per day, up 278,000 barrels per day from the previous week.

U.S. imports nearly 70%, or 10 million a day, crude oil. Mexico is the second largest supply country after Canada, shipping 1.66 million a day to the U.S., according to EIA.

Fierce storms in the past few weeks forced Mexico to close its main oil exporting ports in the crude-rich Gulf of Mexico, cutting off most of the country's crude shipments to the U.S. Over the weekend, Mexico's state-owned Petroleos Mexicanos, one of the largest crude suppliers to the U.S., halted production of 600,000 barrels a day due to inclement weather.

The impact from Mexico will "be made up in the coming weeks," said Williams.

Fed rate cut

"The Fed cuts were pretty much as expected, but it's more bad news for the dollar, which means oil will likely rally even more," said Kevin Kerr, president of Kerrtrade.com and Editor of Dow Jones MarketWatch's Global Resources Trader.

A rate cut will weaken the dollar and raise the appeal of oil as an alternative investment. A weaker dollar also undermines the value of crude for its producers since the commodity is priced in the U.S. currency, putting upward pressure on crude prices as producers move to raise prices to limit the impact of the weak dollar.

"With a weaker dollar, one cannot expect prices to decline much if at all this week," said John Person, president of National Futures Advisory Service, a futures brokerage. In fact, he said, the $100 dollar a barrel oil target becomes more of a reality in this scenario."

"At this point if there were any news-driven shocks to the market that would indicate a supply disruption, oil would certainly be targeted at $120 per barrel, especially in this environment," Person added.

Drop in refinery capacity

In the same report, EIA, which is part of the Energy Department, also said refinery capacity utilization fell sharply by 0.9% to 86.2%. Analysts expected a 0.5% point increase. The utilization was at the lowest in more than seven months.

"The severe weakness in the capacity utilization number is shocking," said Global Resources Trader's Kerr. "If capacity falls there will be less heating oil or gasoline."

The EIA reported that gasoline supplies rose by 1.3 million barrels to 195.1 million barrels in the latest week, down from last year's 206.4 million, while distillate stocks, which include heading oil, diesel and jet fuel, grew by 800,000 barrels to 135.3 million barrels, down from 144.1 million of the same period in last year.

"Without a chance to see oil inventories build we are in for higher prices at the pumps and for home heating costs this winter," said National Futures Advisory Service's Person.

In a separate report, the American Petroleum Institute reported that crude supplies fell by 3.3 million barrels to 311 million barrels. Distillate stocks rose by 3.1 million barrels to 136.2 million barrels, while gasoline stocks fell by 800,000 barrels to 196.1 million barrels, the API said.

On Nymex, November reformulated gasoline jumped 3.7%, or 8.29 cents, to $2.3400 a gallon and November heating oil rose 3.4%, or 8.32 cents at $2.5078 a gallon.

The EIA will release data on natural gas supplies at 10:30 a.m. Eastern on Thursday. John Kilduff, an analyst at MF Global, expects an injection of 56 billion cubic feet.

December natural gas surged 4.1%, or 33.1 cents, at $8.352 per million British thermal units.

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